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Paragon Diamonds could be major player, says Allenby

Published: 21:38 19 Oct 2015 AEDT

paragon_diamond_mining
Paragon Diamonds is a mining company focused on Lesotho

At full production, Paragon Diamonds' (LON:PRG) two mines in Lesotho would be comparable to Gem Diamonds' nearby world-class Letseng mine - at over 100,000 carats a year, says Allenby Capital.

Such output would generate annual gross revenues of more than £110mln and free cash flows of around £40mln, notes analyst Myles McNulty, who adds that the stock is a high risk/reward play over the very short term.

The AIM firm is currently in the final stages of signing a US$15mln financing deal (which is not yet completed, the broker notes) from Acrux Resources to close its acquisition of the Mothae mine from Lucara and to push the two sites to initial production.

"Subject to securing funding – which we anticipate will be successfully achieved in the next several weeks – Paragon will put Lemphane into production in H1 next year," he  says.

"At nameplate capacity, the mine will be processing 3 million tonnes of ore pa which at current market prices will generate annual gross revenues in excess of US$100m.

"The company is also in the process of acquiring the nearby Mothae kimberlite pipe. Mothae will also be put into production next year: once at nameplate capacity of 2 Mtpa [million tonnes per annum], the mine will be generating gross revenues of US$65-70m pa."

McNulty values Paragon's 80% stake in Lemphane at 13.3p a share and its anticipated 75% holding in Mothae at 9.3p a share, making 22.6p.

But it discounts its sum-of the-parts valuation by 50% making a fair value for the shares at 11.3p, still a good distance from the current price of 4.95p.

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